by Archie M. Richards, Jr., CFP^®
February 4, 2002

What's the stock market going to do in 2002?

The answer is, I don't know. Here are the factors contributing to that astute response.

The economic and business news isn't bad. The economy expanded in the 4th quarter of 2001 (much to the surprise of most analysts). For 6 quarters in a row, inventories of goods held by retail stores, wholesalers, and manufacturers fell, thereby cutting the need for production. Replacing those inventories will require manufacturers to gear up once again. Oil prices and short-term interest rates are low. Housing prices have remained stable. U.S. banks can readily increase loans. Unemployment remains under 6 percent, and more tax cuts are on the way.

None of this matters, however, for the future. The current favorable news is the reason why the Dow has risen in the last several months from 8000 to 10000. Stock prices move in anticipation of news. They will move now because of economic and business news no one will know about for 4-to-6 months. The favorable news of today explains where the market has been, not where it's going.

Okay, now for the kind of news that seems unfavorable for the market but actually isn't:

The September attack on New York was an agony for thousands of people. But it provoked a war on terror that will inevitably succeed, making the world safer for everyone. Oh yes, the attack caused a monstrous 5-day selloff. But in less than two months, the prices returned to where they'd been prior to the attack, and they've advanced since. Not a bad response to a disaster.

Last week, Enron's accounting deceptions and the bankruptcies of K-Mart and Global Crossing knocked the Dow down almost 250 points in a single day. But the decline was probably unjustified. Enron has played fast and lose with its books, sure, and no doubt other companies are doing the same. But U.S. corporate accounting has been even more deceptive in the past.

It doesn't matter that K-Mart is getting whipped by Wal-Mart and Target. That's the way capitalism works. Less-creative companies get wiped out by the more-creative, and employees change jobs accordingly.

Nor does it matter that Global Crossing is going bankrupt (except for investors who put a big chunk of their money into it). The fiber-optic lines Global Crossing laid on ocean floors will provide enormous benefits to mankind no matter who owns them.

After investors become burdened with pessimism, the stock market invariably rises. Last week's 250-point drop in one day revealed that investors are quick to despair. That's bullish.

Here's another example of pessimism. At the beginning of each year, Barron's solicits the opinions of respected investment professionals. The Barron's Roundtable in January 2002 included eleven individuals. Seven of them expect stock prices to decline. Two expect them to advance a little. The other two expect prices to advance a lot.

That's 7 bears and 4 bulls. The preponderance of bears suggests that stock prices will rise. Even investment hotshots are more often wrong than right.

We've covered the good news that doesn't matter and other items that aren't as bad as they seem. Now for the truly bad news: U.S. federal and state governments are expanding faster than the economy - and not just because of the war. Beginning in 1999, the prospects of government surpluses induced lawmakers to inundate the economy with pork.

Government growth which is slower than that of the economy, as was the case from 1994 to 1998, causes the market to rise. Rise it did during those years. Government growth which is faster than that of the economy, as was the case during the 1970s, causes the market to fall. I can only hope that President Bush's veto pen holds plenty of ink.

Where does all this leave us? Should we buy stocks or not?

The answer is, buy stocks. In the long run, stock prices rise. In the short run, no one knows what they'll do. Therefore, the time to buy stocks is when you get the money.

But for the most part, forget about individual stocks. Never mind value, growth, big, small, domestic, or foreign stocks. Use index funds or exchange-traded funds and buy 'em all.